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My Market Update today is simply to share with you what I think is timely and relevant perspective. Today’s stock market action could be described as a sector-wide risk-off market rotation out of high-multiple artificial intelligence (AI) stocks. That is a lot of Wall Street speak, but exactly right. In English, current market behavior is shifting. The flow of funds (the money) in the market is, at least for now, leaving one area and going to another. It is apparent that the appetite for high risk stocks is decreasing as money is moving into perceived less risk stocks. The screens I run show that in a striking way. When filtering for stocks Nasdaq traded stocks today that were down -2% or greater, 241 names were found. The majority of these stocks are in the chips, electronics and medical sectors. The filter for those up greater or equal to 2% gave me 258 names. This list was mostly made up by stocks from the bank, financial, insurance and software sectors.
Many of the fast-moving, volatile stocks down the most today have quickly fallen beyond bear market territory – down more that 20% from recent highs. Thirty-eight of them are down more that 25% in the last month. That’s the nature of market rotation. After steep gains since April, many of the AI related stocks are being sold down as money moves elsewhere. This, of course, is nothing new. It defines typical stock market action, particularly over the short term.
Recognizing that AI is a revolutionary technology is not the same as assuming every tech stock will go up indefinitely. History shows that technology waves often involve a period of infrastructure overbuilding, speculative sentiment, and concentrated market risk before mature monetization sets in. The unleashing of ChatGPT was in November of 2022. We have seen that technology wave since. My focus remains on disciplined rebalancing, cash-flow quality, and broad-based diversification rather than chasing short-term momentum.
While speaking with many of you recently as our team is in our “client review season”, I have often mentioned parallels between the 1990’s dotcom bull market and now. Even today, we are hearing of massive front-loaded capex flooding into data centers, specialized AI chips, energy grid capacity, and AI investment in general. The late 1990s saw unprecedented capital expenditure (capex) on physical infrastructure—miles of dark fiber optic cables, routers, and servers. Narrow market breadth is one obvious trait the two tech booms have in common. It, though, is inherently fragile. By 1999–2000, market leadership narrowed drastically. A small handful of technology and telecom giants drove index returns while the rest of the market lagged. I am watching current stock market indicators today that are similar. For one, index concentration in a small group of mega-cap tech stocks (“hyperscalers” and chipmakers) is at or near 50-year highs.
What is noteworthy, and a market condition now that I have talked a lot about, is corporate earnings. This is one issue that differentiates the AI bull market from the late 90’s speculation in the dotcom bubble. Today’s AI leaders are established, highly profitable cash cows with pristine balance sheets. A lot of high-flying internet companies had zero earnings, negative cash flow, and high debt. The current market’s mega-cap stocks are generally grounded in real earnings growth rather than triple-digit multiples on imaginary revenues.
In closing, I find it useful to refer to what Warren would say. Often Mr. Buffett’s wisdom includes ignoring market euphoria, and preparing for inevitable downturns by keeping cash reserves. His advise during times of extreme market sentiment: “Be fearful when others are greedy, and be greedy only when others are fearful.”
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